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In the face of far weaker post-recession economic growth than normal and a discouragingly anemic job market, housing will have to wait until next year and the year after for the gains it needs to dig out of its worst downturn since World War II, according to panelists participating in NAHB’s Construction Forecast Webinar on Oct. 27.
While economists generally have been scaling back their earlier forecasts for housing activity this year, the good news is that the job market should improve sufficiently in 2011 to begin thawing the big freeze in household formations of the past few years and to put consumers in a brighter mood, both of which are prerequisites for boosting housing demand, they said.
Some parts of the country will recover sooner than others, the economists on the panel said, and foreclosures will linger as a problem in many of the largest housing markets. However, supply and demand may be in a healthier balance than suggested by today’s high vacancy rates and even conservative demographic projections suggest that housing production will have a lot of catching up to do in the decade ahead.
“In this recovery, housing just isn’t doing its part,” said NAHB Chief Economist David Crowe. “The Gross Domestic Product isn’t either.”
While typical post-war recessions have been followed by a “robust rebound” in both economic output and housing — achieving “a teeter-totter balance” in the business cycle — “unfortunately, it’s not going to happen this time,” Crowe said.
Following one decent quarter in which the economy grew more than 5%, quarterly growth has slowed to below 2% “and we are not expecting significant growth outward,” he said. GDP growth may rise to 3% to 3.5% by the latter part of next year and into 2012, but it will be “nowhere near the compensating growth you would expect to see after the severity of the recession we suffered,” in large part because of a lack of support from housing.
In a normal economic recovery, about twice as much GDP growth as what is occurring now would be expected, and growth in housing would be two to three times as strong as in the overall economy.
Job Growth the Key
“The key to recovery is job growth,” said Crowe, “and that has been relatively slow.” Average monthly employment growth following recessions in the 1980s and 1990s was in the range of at least 200,000 new jobs. By comparison, the first six months of this year averaged 139,000, including many temporary Census jobs, which barely made a dent in the 8.5 million jobs lost in the recession. “We need to add about 100,000 to 125,000 jobs just to keep up with growth of the labor force,” he said.
Crowe said that the lull in the marketplace this summer following the expiration of the home buyer tax credit “lasted longer and was deeper” than anticipated. About 68% of home builders polled by NAHB in early September reported that their business was being hurt by customer reluctance, and 60% cited competition from foreclosed properties and short sales as a cause for caution.
When asked why buyers were remaining on the sidelines, almost 85% of the builders surveyed by NAHB said it was because they could not sell their existing home and 78% said it was due to uncertainties over employment and the economy.
In the period ahead, Crowe said he was looking for better job creation to spur household formations, which over the course of the recession were 0.5 million to 1.5 million lower than they should have been as people doubled up with friends and relatives. “We’ve got a lot of people right on the edge who will soon form households,” he said. “They are ready to move out and begin to absorb the housing stock that’s out there.”
The current 200,000-unit level of unsold new homes is the lowest since 1968, he said. “Builders have been careful about adding any additional inventory until they are certain they have a sale.”
The supply of unsold existing homes is significantly higher because it includes foreclosures, half of which in this year’s second quarter were concentrated in just five states — Florida, California, Illinois, New York and New Jersey. Fifteen states were responsible for 77% of the 2 million foreclosures in that period.
A Multifamily Surprise
With signs looking favorable that new-home sales will be gradually improving, Crowe forecasted a 37% increase in single-family starts in 2011 to 655,000 units and a further 48% climb to 970,000 units in 2012. Starts this year are expected to rise to 470,000 units, a “marginally better” 8% gain from 2009 but lower than had been originally anticipated.
Multifamily construction, on the other hand, “made a surprisingly decent rebound midyear,” he said. “It had been expected not to do as well in 2010 as in 2009, but that is now reversed. The latest NAHB forecast shows multifamily housing starts bottoming out at 112,000 units in 2009 and then rising 12% this year to 125,000 units, 19% in 2011 to 149,000 units and 41% in 2012 to 210,000 units.
With increasingly more households entering the rental housing market, Crowe voiced concern over eventual shortages in available rental properties.
Owner-occupied remodeling, which declined along with the downturn in housing starts but not as steeply, will continue to post gains, he said, supported by those who decide to make improvements on their homes instead of moving.
The states whose housing markets are almost back to normal are concentrated in the middle part of the country, and with the exception of Texas, are relatively small housing producers. Very powerful housing states like Florida and California are coming back more slowly, he said. “That’s another reason why housing isn’t increasing economic growth as it usually does.”
Better Private Payroll Growth
Maury Harris, chief U.S. economist for UBS, said that 2.7% real growth in 2010 and 2011, while substandard, will generate “some decent results” for business and the stock market. “In terms of jobs, they will pick up next year,” he said. “The longer we can sustain even moderate growth, the more employers have confidence in going ahead in hiring.” They will remain cautious until they see demand staying at least at its current level.
Harris predicted that private payrolls will grow by about 150,000 jobs a month next year, compared to around 95,000 now, leaving the unemployment rate at 9% at the end of 2011.
Once the Federal Reserve begins seeing better job growth, he said, “it will be talking about tightening, not easing.”
For the immediate period ahead, however, the Fed will provide more easing, he said, because it is uncomfortable with today’s low inflation rate. “You have had a slowing in the core consumer price index (CPI) over the past months,” Harris said. “If they don’t have pricing power, employers are more reluctant to hire.”
At least through the first half of 2011, Harris said he expected the Fed to embark on a “lite” version of its first “shock and awe” program in 2008, when it bought about $1.7 trillion in government securities, largely mortgage-backed, in a year-long commitment. This time it will commit to purchasing $200 billion to $250 billion in government notes one quarter at a time. “We are out of recession; it has been a disappointing recovery, but we don’t need to add as much liquidity to the system,” he said.
Harris said he wasn’t as worried about deflation as the Fed because prices appear to have stabilized after a considerable decline and will start to pick up because rents on new leases are on the rise. “If you are looking for an apartment, rents are starting to go up,” he said, “and that’s an important enough element of the core CPI that there will be less concern about inflation” slowing further.
Banks Easing Lending Standards
Harris was confident that better employment gains will be achieved next year because banks — confronted by weak demand for loans and the need to compete for a bigger market share — began easing their lending standards this summer. That historically has been associated with improved private employment growth, he said, especially among firms with less than 50 employees, who have been contending with severe credit constraints.
Republican control of the U.S. House of Representatives will also be heartening to the small business community, easing its concerns over taxation and regulatory policies emanating from Washington and producing a pick-up late in the year in business confidence indexes, he said.
The savings rate as a percent of disposable income, which has jumped from 2% to 6% in recent years in response to economic conditions, is unlikely to rise higher and undercut a recovery in consumer spending, Harris said. The very low interest rates available on savings alone will help discourage savings from rising much higher.
Household debt burdens relative to income “are tumbling,” he added, a good omen for stronger consumer spending. “Debt is holding back the consumer less and less.”
Foreclosures will remain high as long as unemployment is high, Harris said, but those who lose their homes “have to live someplace,” and that will lead to increased demand for rentals. “When rents go up, that helps the demand for housing,” he said.
A Severe Market Correction
“Most economists now are predicting job growth next year that would be sufficient to begin to eat into the unemployment rate,” said Eric Belsky, managing director of Harvard University’s Joint Center for Housing Studies. “Jobs are very critical to a recovery in housing, because it goes straight to consumer confidence and business confidence. The longer housing remains stressed, the lower the confidence of most decision makers in the economy.”
He added that, “Due to substantial headwinds, the housing recovery will likely be slow unless job growth stages a more convincing rebound.”
Taking a broader and longer view of the housing cycle, Belsky said that the market has now corrected for the housing boom with a severe downturn in which both home prices and home building have dropped dramatically, and this has some positive implications for future growth.
The declines in house prices and mortgage rates have reduced average monthly home payments to a historic low. “This is a plus because when a more meaningful recovery does begin, more people will be able to get into the market,” he said. “An environment that is remarkably affordable is likely to hold for the better part of next year and beyond.”
And as a result of steep cuts in production during the downturn, a total estimated 15.8 million completions of single-family and multifamily homes and placements of manufactured homes from 2001 to 2010 puts the supply of new housing for this period back into balance with demand.
“The market doesn’t look like it’s oversupplied in the long term,” Belsky said, and the current inventory should be absorbed as demand returns. A similar trend is occurring in remodeling.
The millions of home owners who are underwater and owe more on their home than it is worth pose an ongoing impediment to existing and trade-up home sales, he noted. “In key states, there are stunning numbers.” In Nevada, for instance, two-thirds of mortgages are underwater. These home owners “are continuing to make their mortgage payments but they are not in a position to move or refinance. This will be a drag on new home sales and remodeling.”
Looking at the 10-year period ahead, Belsky calculated that demand for new housing will most likely top 16 million units and could range to 18.7 million on the high side.
Two-thirds of the demand will be coming from household formations, which will be fueled by an aging population, by the extra-large echo-boom generation of children of baby boom parents and by immigrants, he said.